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In summary
Direct vs Regular Mutual Funds - Which Is Better
Direct and regular plans can belong to the same mutual fund scheme and invest in the same underlying portfolio. The main difference is whether a distributor is involved and how the related costs are charged.
- Direct plans do not involve a distributor.
- Regular plans are routed through a distributor.
- Direct plans generally have lower expense ratios.
- Both plans can have separate NAVs.
- Your scheme-level investment risk remains linked to the underlying portfolio.
- Regular plans may provide distributor support.
The Bajaj Broking website provides access to mutual fund investments. Before choosing a plan, consider how comfortable you are with selecting and managing investments, along with the costs involved.
What are direct and regular mutual fund plans?
A mutual fund scheme can offer both a direct plan and a regular plan. These plans have the same or common portfolio and are managed by the same fund manager, but their expense ratios differ.
Direct plans
In a direct plan, you invest without routing the investment through a mutual fund distributor or agent. As distribution costs are not included, the expense ratio is generally lower than that of the corresponding regular plan.
You can learn more about the role of an AMC.
Regular plans
In a regular plan, you invest through a mutual fund distributor. The distributor can assist with the investment process and ongoing services. Distribution-related costs are reflected in the plan's expenses.
You can also learn about mutual fund distributors.
What is the difference between direct and regular plans?
The key differences are related to distribution, expenses, and the support available to you.
| Feature | Direct plan | Regular plan |
|---|---|---|
| Distribution | No distributor involved | Routed through a distributor |
| Expense ratio | Generally lower | Generally higher |
| Portfolio | Same or common portfolio | Same or common portfolio |
| Distributor commission | Not included | Distribution costs apply |
| Investor management | Generally self-managed | Distributor support may be available |
| NAV | Separate NAV | Separate NAV |
SEBI states that direct plans have lower expense ratios because distribution expenses and commissions are excluded. It also states that direct and regular plans have different NAVs.
Why do direct plans have lower expenses?
The expense ratio represents the recurring expenses charged to a mutual fund scheme. A direct plan does not include distribution commission, so its expense ratio is generally lower than that of the corresponding regular plan.
Understanding the cost difference
A lower expense ratio means less of the scheme's assets are used to meet the applicable recurring expenses. Over time, this cost difference can affect the net return you receive.
However, a lower expense ratio does not guarantee a particular return.
Understanding the effect on returns
If two plans have the same underlying portfolio, their investment performance can differ because their expenses differ. The difference may become more noticeable over a longer period as returns compound.
This does not mean that every direct plan will always deliver a higher return than every regular plan. The comparison should be made between the corresponding direct and regular plans of the same scheme.
What stays the same between the two plans?
A direct plan is not a separate portfolio with different securities from the corresponding regular plan.
Same underlying portfolio
Direct and regular plans of the same mutual fund scheme have the same or common portfolio and are managed by the same fund manager.
This means choosing a direct plan does not, by itself, change the securities selected by the fund manager.
You can also understand the role of mutual fund units before investing.
Different NAVs
Direct and regular plans have separate NAVs. The difference in expenses can contribute to a difference in their NAVs over time. SEBI confirms that the NAVs of direct and regular plans are different.
How does risk differ between direct and regular plans?
The direct or regular label does not by itself determine the investment risk. For the same scheme, both plans have the same underlying portfolio.
Scheme-level risk
Your risk depends mainly on the mutual fund scheme, its investment strategy, portfolio, and the assets it invests in.
For example, a direct plan of an equity fund does not become less risky simply because it has a lower expense ratio.
Riskometer
Before investing, check the scheme's SEBI Riskometer. The categories are Low, Low to Moderate, Moderate, Moderately High, High, and Very High.
Consider the Riskometer along with your financial goal, investment horizon, and ability to handle market fluctuations.
Which plan may suit your investment approach?
The choice depends on how you prefer to manage your mutual fund investments.
Self-managed investing
A direct plan may suit you if you are comfortable researching mutual funds, comparing schemes, completing transactions, and reviewing your investments yourself.
Lower costs may also be an important consideration for you.
Distributor support
A regular plan may suit you if you prefer to invest through a mutual fund distributor and want assistance with the investment process or ongoing services.
The support provided and the associated costs can vary, so check the applicable terms before investing.
What should you know before switching plans?
You can switch between direct and regular plans, but you should check the financial implications before doing so.
Tax and exit load
A switch can be treated as a redemption from one plan and a fresh investment in another. This may have tax implications, and an applicable exit load may also need to be considered.
Tax treatment depends on the type of mutual fund, holding period, and applicable tax rules. Check the current rules and scheme documents before switching.
Reviewing your investment approach
Do not switch only because a direct plan has a lower expense ratio. First consider whether you are comfortable managing the investment without distributor support.
Also check the applicable costs, tax implications, and transaction process before making the change.
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Can you invest in both direct and regular plans?
Yes, you can invest in both plans, subject to the applicable scheme and investment requirements. They are separate plans of the same scheme and can have different expense ratios and NAVs. Before investing in both, consider whether doing so serves a clear financial purpose.
Are direct plans riskier than regular plans?
No. The direct or regular structure does not by itself determine the investment risk. Direct and regular plans of the same scheme have the same or common portfolio. The scheme's underlying investments and strategy determine the market risk you take.
Can you switch from a regular plan to a direct plan?
Yes, you can generally switch between the plans of the same scheme, subject to the applicable process. A switch may have tax implications or an exit load, where applicable. Check the scheme documents and understand the costs before making the change.
Does switching from regular to direct have tax implications?
It can. A switch may be treated as a redemption from the regular plan and a fresh investment in the direct plan. If the redemption results in a capital gain, applicable tax rules may apply. The tax treatment depends on factors such as the fund type and holding period.
Does a lower expense ratio guarantee higher returns?
No. A lower expense ratio can reduce investment costs and may improve the net return compared with the corresponding regular plan, all else being equal. However, it does not guarantee a profit or a particular return. Market movements and the performance of the underlying portfolio also affect your investment.
Disclaimer
Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319
BFL does NOT:
(i) provide investment advisory services in any manner or form.
(ii) carry customized/personalized suitability assessment.
(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.
In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.
Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.
Disclaimer on Risk-O-Meter:
Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.
Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.
Disclaimer
Bajaj Finance Limited ("BFL") is an NBFC offering loans, deposits and third-party wealth management products.
The information BFL contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.
This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.
Disclaimer
Mutual Fund SIP calculator may provide potential investors an approximate estimate on the maturity amount of the monthly SIP, purely based on mathematical calculation of the projected annual return rate selected by investor. However, such calculation does not factor the actual performance by the Asset Management Company (AMC) and should not be treated as any advice or assurance about the actual return of investment. Mutual Funds do not have a fixed rate of return and it is not possible to predict the rate of return. Please note that the SIP calculator are for illustrations only and do not represent actual returns which may vary depending on various factors including but not limited to actual performance, expense ratio, taxation, exit load (if any), etc.